The economy is growing at a good clip and businesses are getting their mojo back. The commercial real estate market is in a nice state of equilibrium. Commercial landlords are getting decent rents and tenants can afford them. But in the continuing low interest rate environment, many business are tempted to buy instead of lease. After all, why should they pay so much rent if it is economically advantageous to own their own building? Good question...complicated answer.
The economic factors that work in favor of ownership are very alluring and real: saying goodbye to rent increases and property tax surprises (when a landlord sells the building where you lease), control over building operating expenses, and depreciation. An experienced commercial real estate broker should have the tools to plug salient data into a financial model and quickly analyze whether leasing or buying is to your advantage. But there are several factors that your broker needs to run you through to see if you are really ready, willing, and able to be a building owner:
Buying a building requires capital for an equity down payment. Think about the opportunity cost associated with those dollars; in other words, what could that money be earning you if put to other business purposes, i.e. new equipment that generates higher production output?
If you are considering buying a building that is larger than you need (SBA financing requires that the borrower occupy just 51% of the building), are you really prepared to take on the leasing risk and the property management responsibilities?
What is your exit strategy? Will the building or commercial condominium be easy to sell on the open market, with or without your business inside?
These are complicated issues that should be talked through in detail with your real estate advisor. No matter what your motivations are to buy, once you own, you are in the real estate business. Think this through...do you want to be?
If you or one of your clients are evaluating whether to buy or lease, call me.